GLOBAL - Integrating environmental, social and governance (ESG) into the investment process with a mainstream model may not be ideal, according to the chief executive of Sustainalytics.

Speaking at the TBLI conference in London at the end of last week, Michael Jantzi pointed out that, while investors could measure certain ESG criteria such as carbon emissions, other issues such as indigenous rights were more difficult to define and quantify.

He said: "Are we always going to struggle to put the square peg into the round hole? We always start with the mainstream model - maybe we need to change that."

This was also reaffirmed by Amanda Young, SRI officer at Newton Investment Management.

She said that, because investors could not put the quality of a company into a model, it was important to meet them and engage with them.

Integration of ESG into the investment process remains still more advanced in Europe and Australia than in the US.

This is largely down to two barriers, according to Jantzi: fiduciary responsibility because of the fear of litigation of US pension funds and the perception that the governance of pension funds is a single homogenous structure.

But, due to the 'carrot and stick' approach of the US regulatory environment and the ease with which they can file shareholder proposals and get a company's attention, US investors are the best engagers in the world, he said.

"However, due to the historic legacy, activism can backfire when it comes to the mainstream," Young added. "We are trying to educate our clients that it is not about activism but financial returns."

Jantzi said: "An activist's desire to generate returns is no less than that of a mainstream investor."

One major challenge remains the disconnect between different sets of investors, with pension funds interested in the long term, while asset managers are judged on the performance over the last six months.

The journey ESG has taken is reflected in the more than 900 signatories with $30trn (€22trn) in assets under management the UN Principles for Responsible Investment (UN PRI) initiative has gained since its foundation in 2006.

At another panel session, James Gifford, executive director of the UN PRI, said: "The majority of our signatories are investment managers.

"This demonstrates asset owners are starting to put a lot of pressure on their investment managers to do something about responsible investment."

They also include ESG in their requests for proposals far more frequently than in 2005.

There has been a sharp increase in the inclusion of ESG criteria in emerging markets as well as in non-listed asset classes such as private equity, listed real estate and sovereign fixed income, according to UN PRI.

Half of signatories now apply some form of active ownership to other asset classes beyond equities, which they did not do five years ago, while two-thirds of asset owners to a certain degree include ESG factors in their contracts with external managers.

However, executive remuneration remains a problematic issue.

Frank Curtiss, head of corporate governance at Railpen Investments - which prefers a "quieter form of diplomacy" with companies - said: "It looks like investors had very little impact on pay, but, in fact, companies are not keen on having their remuneration reports defeated, and they do engage behind the scenes quite extensively."

But Howard Pearce, head of environmental finance and pension fund management at the Environment Agency Pension Fund, said: "It seems to me that a lot more work needs to be done in this area. The criteria on which remuneration is based is not transparent."

He suggested linking the remuneration of chief executives or boards to ESG criteria.